Steve Nola

Gary Burg

Well-Connected PoweredLocal adds big backers in $500,000 raise

As the innovation capital of the world, Silicon Valley has given birth to some of the world’s most successful start-ups. Organisations that have grown to be the big brands infiltrating every aspect of our lives – Netflix, Facebook, Apple, eBay, among them. There are many more.

It makes you wonder, is there something in the water?

Do the Silicon Valley success stories all have a tried and tested formula?

What do these brands share? Aside from making us all wish we’d been the ones who thought of them first.

While Australia has a fledging start-up culture, the fact remains that most ‘unicorns’, that is start-ups whose value exceeds $1billion, are born in the US and Israel.

It typically requires a magic mix of creativity, bravery, innovation and substantial financial backing to make it past the first 18 months of business, let alone reach the nirvana of start-up world – an exit.

The CBI Global Tech Exits Report
shows that half of last year’s tech exits were in the US. Australia came in at seventh place. We’re likely to see a continued upward trend locally as the start-up sector matures. In three to four years, we’re sure to see a steep increase in funding numbers – both from the government and private investors.

Do companies looking for an exit in the next couple of years need to follow the money and move to the Valley? The answer is no.

Prominent entrepreneur and CEO of Melbourne start-up Nitro, Sam Chandler, has been a vocal advocate for the Aussie start-up sector. He recognises that access to venture capital is the main barrier to further growth. While there are several measures in place to support new businesses – the R&D tax incentive being just one of them – the truth is US investors still have the deepest pockets.

One of our local clients who successfully made the transition, RangeMe, highlights the ease at which start-ups can raise capital from major venture firms in the US. On the flipside, given the rich pool of talent in the Valley area, there’s also stronger competition.

It requires a much more creative and succinct way of pitching. So say “adios” to long and tedious investment docs and come armed with a 10-page PowerPoint.

This streamlined approach gives investors working with early-stage companies greater clarity. Does the world need this product and will it scale? It also gives them a stronger sense of the ‘gut feeling’ they have towards the company – which to most is the ‘magic formula’ they use to pick winners.

Due diligence on profit, liabilities, contingencies and a business plan follow as start-ups grow and raise larger rounds Assessing early stage deal flow is a mix between an art and a science and selecting winning teams and pitches is a key component.

As RangeMe and other businesses have observed, being an Australian start-up in the US market comes with many perks. These include dual citizenship, which allows you to double dip on the benefits of being an Australian business in a foreign country – like retaining the R&D tax incentive. Although it can be a complicated process, partnering with an R&D expert to structure this properly will give you an extra two to three months’ runway when raising capital. That’s an incredible bonus.

Understanding of the Australian market is useful to your company, but is likely not seen as a huge benefit by your investors. At least not yet. That’s not to say Australia is insignificant due to the size of its population. Just look at Israel, a small country with a strong reputation in the global start-up community.

Australia is developing a name in the start-up sector because of recent activity in the market. However, until we have some more winners under our belt, the Valley will continue to consider Australia up and coming rather than a mature player.

If your goal is to create a unicorn, regardless of where you are, there are three key things you need to consider:

Am I scalable?

If you have all the systems in place to deliver a never-ending supply of product or service as you grow, then great. If not – moving to a different location probably won’t fix your issue and, if anything, will have an adverse effect.

Can I penetrate the global market?

This is the secret sauce in becoming a unicorn. Your investors will want to see how the business has a global audience regardless of where it was born.

Can I plug into the start-up system?

Australia has a solid start-up culture, albeit developing. By taking advantage of the industry niches and business circles around you, you’ll be plugging into an incredible pool of knowledge and doors will inevitably begin to open.

Ultimately, there’s benefits on either side of the coin. Depending on your industry, stage of growth and business challenges, you’ll need to consider carefully how to use time in Silicon Valley to your advantage.

If you
invested in an Early Stage Innovation company (ESIC) during FY17, you may be
eligible to receive tax incentives. These benefits aim to reward ‘angel’
investment in innovation companies, providing eligible investors with:

· A
non-refundable carry forward tax offset of 20% of the qualified investment
amount (Capped at $200,000 per investment per annum)

· Modified
Capital Gains Tax treatment, whereby capital gains may be disregarded if the
shares are continuously held for a minimum of 12 months and less than 10 years

· Early
stage investor tax offsets can carry forward into future income years

However, in
order to receive these tax benefits, all investments within FY17 must be
reported to the Australian Tax Office by the 31 July 2017.

What you
need to know as an ESIC:

Investors
are able to claim the ESIC tax incentives as long as the company qualifies as
an Early Stage Innovation Company immediately after the new shares are issued
to the investors. In order to qualify, a company must satisfy:

· The
Early Stage Test and

· Either
of:

a. The 100 point innovation test or

b. The principles based innovation test

If the
company qualifies as an ESIC, the
company must report all of their investor’s qualifying investment during the
financial year
. In order to do so, the ESIC will require the investor
details (name, ABN, address and details of share issue). The reporting of this
information can be undertaken online here
.

The ESIC is
required to report the information of investment by 31 July each year.
Reporting of this information can be done electronically, and is available on
the Business Portal by logging on and selecting ‘Online Forms’ in the left hand
menu. It is also available on the Tax Agents Portal under ‘Client Forms’ in the
left hand menu.

What you
need to know as an investor:

In order to
qualify as an early stage investor, all investments must have been for the
purchasing of new shares in a company issued on or after 1 July 2016. In order
to qualify as an investor in an ESIC:

· As
the onus is on the investor to prove the company qualifies as an ESIC, the investor
must keep detailed records outlining their entitlement to the ESIC tax
incentives, including documentation of the amount and time of investment

· The
investor should ensure that the company has properly reported the qualifying
investment to the ATO

· Should
the company qualify as an ESIC, the investor’s accountant must include the documentation of investment in the tax return for FY17
in order to receive the benefit

Following
the ESIC’s submission of the form, the ATO will assess the investor’s
qualification for these tax incentives. It is important for the investors to
also lodge their tax return as soon as possible in order to demonstrate their
entitlement for the early stage investor tax offset.

After all, there are streets in the city for different staged start-ups, 3rd Street is where Series A players play, Market Street Series D… and so on.

Start-ups flow in to The Valley like honey from a bee hive. And they work just as hard as the bees that make the honey!

The question that is all too often asked is this – does an Australian start-up need to move to The Valley to be successful?

Having just returned myself from a recent trip, where I met start-ups and investors, we discussed this question with one of our clients, RangeMe
, a client with whom we’ve worked together on for the R&D Tax Incentive.

RangeMe successfully transitioned to The Valley, raised capital and then successfully exited to a group called ECRM. They did this all within about two years of touching down in San Francisco.

A very important point to consider is sheer market size.

The new Census data released this week puts the current Australian population at around 23.5 million, while the same stat for America is a staggering circa 320 million.

What does this tell you?

Well, if your dream or goal is to create a Unicorn, or at least a start-up valued in the 100s of millions, then you must be able to penetrate foreign markets.

RangeMe articulated the benefits of having started off and grown (to a respectable size) in Australia:

In built long term connections: this was instrumental in raising its Australian seed round

Great test market for proof of concept: allowing them to get the company to a good valuation

R&D Tax Incentive: critical for cashflow to keep going

Educated and sophisticated population eager to try cutting-edge technology

But considering if, and when to move, is a tough decision. You will have many factors to consider. The industry your start-up is in, your stage of growth and whether you want to be overseas.

What to know about Silicon Valley

From our discussion with RangeMe, and from my own observations, there are 10 tips and benefits of moving to The Valley:

1. Easier to commercialise and grow in a big market geared for tech start-ups

2. Raising funds is easier: valuations are higher and there are many VCs looking for opportunities

3. Retaining the Australian R&D Tax Incentive can be done and is imperative: the incentive ensured RangeMe had an extra two to three months’ runway when raising capital, an unbelievable advantage but this should be structured properly with an expert

4. Technology start-ups are an industry in San Francisco: a good start-up can plug into the system and doors will open-up

5. Americans want to invest in an American entity: a flip up will be required between Australia and US entities

6. Shareholder’s Agreements are different in the US: there can be up to seven parts in the US but one main part in Australia

7. Understand San Francisco start-up lingo and terminology to be taken seriously

9. San Francisco investors only want to see a 10-page PowerPoint, don’t do investment docs: you will have 30 – 45 mins to pitch (unless you have entered a pitch contest)

10. When it gets down to negotiating a potential investment, get good tech lawyers to represent you (pay for this): they will understand if the investment terms are founder friendly or not

It’s very apparent that the decision to move or not is different for each founder and company. But to become a serious technology success story, start-ups need to be able to scale and penetrate the world’s biggest markets.

Melbourne-based social media intelligence start-up Powered­Local has closed a $500,000 raise, adding some big names to its list of backers, including Salta Group’s David Tarascio and Netspace founder Stuart Marburg, as well as lead investors Rimon Investments.

Mr Tarascio is the son of property magnate and BRW
rich lister Sam Tarascio and Mr Marburg appeared on the BRW
young rich list in 2013, having founded and then sold Netspace to iiNet for $40 million in 2010.

Rimon Investments, which led the raise, is investing in PoweredLocal for the first time. Rimon’s
start-up investments, focused on Melbourne, are now being spearheaded by Dimension Data’s Steve Nola.

Other first-time investors include Avalanche Technology Group boss Peter Cameron, who founded AVG Antivirus, and prolific angel investor Adrian Stone, founder of AngelCube.

David Engel, general manager of Doshii, has also participated. Doshii is a payments start-up backed by Westpac’s Reinventure arm.

PoweredLocal has received a follow-on investment from Adam Clarke, former managing director of Open Table.

The start-up’s CEO, Michael Jankie, told The Australian
the funds would be used to accelerate the company’s growth, and said it was already profitable.

“We could’ve funded the new stage of the business through our existing revenue” Mr Jankie said. “What we wanted was a group of smart, well-connected supporters that understood our business and could lend their expertise to prepare us for explosive growth. That’s what we’ve got.

“For me and my co-founder Gary (Tramer) it was a bit strange, we actually said as founders it’s lonely at the top, and we wanted more outside smarts. ”

Mr Jankie said his business model had expanded somewhat from being a WiFi provider for cafes and other bricks and mortar businesses to also providing data analysis and word-of-mouth referrals for businesses.

“The real opportunity here is not 100,000 customers paying 50 bucks a month, but we think there’s much more to it,” Mr Jankie said.

The End of Financial Year (EOFY) is a time to get our ducks in a row and dot those Is and cross those Ts. In most, cases this would have to do with getting your taxes in order. Let’s try to apply this discipline to a more “fun” aspect of EOFY figures – getting some cash back from the government. The most popular government grants or incentives are the R&D Tax Incentive and EMDG (Export Market Development Grant).

Each of these offer eligible Australian businesses generous cash back opportunities.

To optimise your ability to get this cash back, a business needs to be aware of some make or break tips before EOFY.

We have compiled a list of some things to look through before the EoFY in order to put your company in the best position.

R&D Tax Incentive tips

1. Payments to associates

Since payments to Associates can only be claimed if they are actually paid, make sure that all these are paid by 30 June 2017. This would include for example salaries to founders or shareholders.

2. Record keeping

Good record keeping is essential for substantiating your claim. Go through your records and make sure everything is up to date and well organised. Not only your financial records should be in order but also the technical records to evidence the R&D work that you have undertaken.

3. Connected/affiliated entities

Make sure contracts and payments are completed with your connected or affiliated entities.

4. Superannuation

Super cannot be claimed as a tax deduction unless it was paid by 30 June 2017.

5. Overseas R&D

You cannot claim R&D activities undertaken overseas unless you have an Overseas Finding. An overseas finding needs to be submitted to AusIndustry before 30 June 2017 for any work you wish to claim for the FY17 year.

6. Pooled assets

Depreciation on pooled assets cannot be notionally deducted for R&D purposes. Consider depreciating R&D assets in their own category.

7. Aggregate turnover

If an entity has an aggregate turnover of more than $20m, then it does not qualify for the 43.5 per cent refundable tax offset, instead it qualifies for a 38.5 per cent non-refundable offset. The Aggregate Turnover is calculated as the annual turnover of the R&D entity for the income year plus the annual turnover of any entity that is connected or affiliated with the R&D entity, for that part of the income year that the entity is connected with you.

EMDG tips

1. Cash accounting

EMDG works strictly on a cash basis, meaning that you can only claim amounts that were actually paid by 30 June 2017. So, make sure that anything you want to claim is paid before the end of the month.

2. Reimbursements

Make sure any expenses paid for by employees of the company on behalf of the company have been reimbursed.

3. Contracts

Make sure your contracts with overseas reps and marketing consultants are clear and signed. Their duties need to be clearly articulated in the contracts and they should have records of the work they did for you.

4. Internal company transactions

If you have multiple companies, it is essential that contracts and flow of money between entities is clear and intercompany transactions are done before June 30, 2017.

Remember – all revenue and expenditure needs to be taken up by the Australian entity making the claim.

There was a buzz in the air as we drove past some of the
biggest companies in the world on 6 lane wide highways. We had arrived in San
Francisco and were all ready to be engrossed in the vibrant startup culture
that it had to offer.

We soon realized that we were starving, and decided that we
all needed a boost to deal with the time difference and get through the day.
After stuffing down an average tasting coffee and a bagel with “lox”, we drove
to the famous Stanford University. We were quickly impressed by the world-class
facilities present, and enjoyed the bike-riding student culture. It was fitting
that the beginning of our trip, in which we aimed to learn from the
startup-culture of Silicon Valley, had its first stop at the university where
so many notable alumni and entrepreneurs had emerged, including Larry Page
(Founder of Google) and Elon Musk (world-famous inventor).

In the afternoon, we had our anticipated meeting with our
client RangeMe, an Australian startup that transitioned to San Francisco while
maintaining their Research and Development processes domestically. Hearing
personally from the founders of RangeMe, who were already a client before a
successful transitioning overseas, was important in gaining insight into the
differences between the still maturing startup culture of Australia against the
mature and sophisticated startup industry in San Francisco. The ease at which
startups can raise and generate capital from major Venture Capitalists was
intriguing, with many capital raising rounds enticing investors to pour their
money into companies across a variety of sectors. It was clear that the overall
quality of talent helps to build the competitiveness of every startup within
the Silicon Valley region, and sets an example for the Australian market to try
and replicate.

We finished off our day with a walk through “downtown San
Francisco” (please read in an American accent), a tasty dinner in China town, a
walk by AT&T Stadium (home of the SF Giants, of which we are all now big
fans), and a relaxing time in the Jacuzzi at our 5-star house.

Day 2 started with an interesting experience at a Silicon
Valley Startup Fair. Immersing in the startup culture was key to gaining the
most from our time away, and we quickly established strong connections and networked
with some of the top talented entrepreneurs in the area. A unique
beer-manufacturing machine caught my eye, as well as other education-based
software development projects.

In the afternoon, we attended a Pitch Day at Founders Space,
the number one accelerator for overseas startups as rated by Forbes. Each
startup had their CEO pitch their business for approximately 5 minutes,
explaining the need of the product, their uniqueness and the amount and aim for
the funds being raised. Attending as investors of a fund gave us a high level
of credibility amongst the startups, with many quickly approaching us to pitch
their ideas. Impressive startups included Equobot, a news filtering app that
gives advice to stock investors based off information in the market, as well as
Spryfit, a money-making incentive app for exercise-enthusiasts. What was very
interested was the way in which the CEOs presented themselves while pitching.
Not one suit was seen. Coming from Australia, where outward presentation is key
for any person to be taken seriously, seeing people pitch in jeans and a
t-shirt was interesting.

On day 3, we had the highly anticipated meeting with one of
the most successful early stage venture funds and seed accelerators in the
world, 500 Startups. We discussed the buying and investing side of the startup
market, gaining clarity over successful and effective investment processes, the
way in which the company guides their startups to raise capital, and how to
become a global, billion-dollar company. Easier said than done. However, it was
evident how much we gained for the experience of learning from a knowledgeable
partner at a successful venture capital firm.

Our next stop was Google, something we were all looking
forward to. We all expected a massive skyscraper that could be seen from miles
(because American’s don’t use kilometres) away. However, what we saw was a
massive suburb with Google buildings spread all around. It was easy to see how
they had become so successful. In a culture of bike-riding, innovation and
casual dressing, it was clear to see that everyone in Google is encouraged to
attempt the impossible, to try and grow and take things to the next step. Such
an environment can only be positive.

After an afternoon of shopping (which was an afternoon too
long for me), we attended an interesting talk from “Growth Hacker” Sean Ellis
who spoke about driving sustainable growth within startups. Key takeaways
include the importance of focusing on high leverage goals to improve
sustainable growth, aiming to understand the value added for customers to
ensure retained growth, as well as the necessity to have a high level of
velocity of testing and experimentation to drive innovation and development of
processes and products.

As Friday was our day off, we decided to do some exploring
around town. We enjoyed a great tour around AT&T stadium, and basked in the
beautiful weather and views of the Golden Gate Bridge and San Francisco Bay
area.

We wrapped up our trip in the US by spending an afternoon in
LA, driving through Beverley Hills, seeing the famous Hollywood sign (from a
vast distance), as well as seeing the “Walk of Fame” and enjoying a delicious
meal together at a Japanese restaurant.

Although boarding the plane was upsetting as our trip was
coming to a close, we were all alive with new ideas and opportunities for when
we get back. The future is bright.

Chief executive of the
Australian arm of global technology services giant Dimension Data Steve
Nola will turn his eye towards investment opportunities in the local
tech startup scene, joining investment arm of Rimon Advisory as a
non-executive board member.

Mr Nola will continue in his role at
Dimension Data, but will help Rimon identify new investments, which
generally start at the seed round, before progressing to the second
stage follow-on rounds.

Rimon Advisory has operated for about five
years, helping entrepreneurs plan long-term growth and advising on how
to maximise available grants and tax incentives. It opened up a venture
capital arm two years ago, enabling it to back some of the companies it
was working with and then participate in subsequent rounds.

So far
it has publicly disclosed investments in three start-ups; logistics
technology provider Premonition, transport and airport connection
platform Jayride and online concierge service Amazing Co. However it has
also agreed investments in two further start-ups; foreign exchange
platform Psyquation and social media intelligence firm PoweredLocal.

Mr Nola said the new
role would benefit his existing employers at Dimension Data, giving
greater insight into the disruptive small players that could be future
partners or competitors to reckon with down the track.

He said he had long
harboured a passion for the disruptive innovation happening in the
startup scene and felt Rimon had hooked into a good model in mixing an
existing advisory firm with investment.

"In my 30 years at
Dimension Data I have seen a lot of customers with fantastic ideas that
have never been given the opportunity to really flourish and take things
to the next step," Mr Nola said.

"I want to impart some of the
skills and knowledge I have picked up on to smaller start-up
organisations ... If you are going to invest in something early stage
you want to be able to give it more than just dollars in terms of
capability to go with it."

Rimon Advisory co-founder and managing
director Lior Stein said the company's advisory business provided it
with an excellent vetting opportunity for potential investments, and
that the company was not looking for companies operating in any
particular sector. He said the firm looked for the basics of a strong
leadership team, a scalable product and a large (preferably global)
addressable market.

"We are looking to
invest in technology that we think is interesting and that we can have a
relationship with the team and have fun in the journey," he said.

"Every team we have invested in, we really enjoy spending time with them."

Mr
Stein and Mr Nola both said they believe there are great opportunities
for Australian entrepreneurs to think big, while remaining at home,
however Mr Stein expressed concern that the prevailing political
discourse around innovation had taken a turn for the worse.

He
said that while the recent abolition of 457 skilled migration visas and
rumoured negative changes to R&D tax incentives were understandable
from a political perspective, they sent the wrong message
internationally about Australia's standing in the global technology
ecosystem.

"I think the government
gives mixed messages ... When the Innovation Statement came out it was
very positive, but then the R&D tax incentive was reduced, and there
has been regular talk about changes that may or may not come, which
creates nerves and stress," Mr Stein said.

"The 457 visa changes
were not helpful, when you are building a global tech economy and you
want to compare yourself to the likes of Silicon Valley and Israel ...
they are open to the world.

"There needs to be a better balance
between wanting to take care of your own, which is important, and also
showing a message to the rest of the world that we are actually a big
player."

When the government budget is released,
there is always one constant: anxiety and confusion. Amid the deciphering of
the ‘millions and billions’ of new complexly named government initiatives, most
households and businesses end up asking the same two questions:

What does any of this mean, and how does this affect me?

As an innovator, start-up or entrepreneur,
here is what you need to know about the $29.4 billion budget deficit for
2017-18:

R&D
TAX INCENTIVE

The R&D Tax Incentive, which focuses on
encouraging startups and established businesses to invest in new innovations,
has largely remained the same
with
the following characteristics:

43.5% refundable tax offset of
eligible entities with an aggregate turnover of up to $20 million per annum

38.5% non-refundable tax offset
to other eligible entities, with unused offsets being able to be carried
forward to future fiscal years

$100 million threshold of
R&D expenditure

INCREASED
ADVANCED MANUFACTURING FUND

Importantly, new funding has also been
dedicated to growing the booming technology startup space, with $100 million being allocated to create an
Advanced Manufacturing Fund
. The new fund aims to stimulate the
manufacturing sector to embrace new technologies, boost innovation and
employment in a transitioning economy, as well as investing in emerging
engineers and scientists.

EXPORT
MARKET DEVELOPMENT GRANT (EMDG)

The Export Market Development Grant
provides substantial support to small and medium sized businesses, reimbursing
up to 50% of eligible export promotion expenses relating to overseas
representatives, marketing consultants, marketing visits, free samples,
Intellectual Property registration, trade fairs and seminars and promotional
literature and advertising. Austrade will continue to administer the Grant,
with eligibility requirements remaining
the same
for 2017-18, including:

Up to $50 million of income in
the grant year

A minimum of $15,000 of
eligible expenses (first year applicants can combine the previous two years of
expenses for the claim)

The commitment of the government to EMDG is
evident, with $137.9 million
being
dedicated to the success of the initiative.

OPENING
CROWD-SOURCED EQUITY FUNDING TO PROPRIETARY COMPANIES

The new budget will introduce new financial
services regulations, particularly affecting the banking sector, with the aim
of motivating the Fin-tech industry to produce new and innovative products and
services. These regulations will enable businesses to test their innovations in
the market within a license, provide holistic financial advice, issue large
amounts of consumer credit, and reduce the number of Australians taking their
skills offshore.

Moreover, in line with the introduction of these
new financial services regulations, the government have also reduced red-tape
involved in capital raising for startups. The new budget has included
legislation to open Crowd-Sourced Equity
Funding (CSEF) to proprietary companies
, providing new funding avenues for
startups that face difficulty raising capital from traditional sources.

Ultimately, 2017-18 is set to be an exciting year for startups
looking to
undertake new ventures and seek to achieve the new innovations that could take their
business to the next level. Given the cash deficiencies that are often
experienced by startups, this could be the best year to take advantage of the
R&D Tax Incentive, Export Market Development Grant and the new regulatory
environment for the financial services industry to increase the cash within your
business and seek to grow from Start-Up
to Success
.

An anomaly about government funding is that despite being such an attractive source of cash, the majority of eligible companies either don’t know it exists or don’t know how to access it.

If I were to simplify government grants I would explain them in two points:

The first being Innovation and the second being assistance for bringing foreign revenue to Australia.

The benefit involved in attaining government funding can be quite large and at times could amount to between 40 per cent and 50 per cent of funds spent in innovation or marketing to foreign markets.

INNOVATION GRANTS

Ask yourself the following question: are you doing something different that you believe your competitors aren’t doing, and that is new in the space?

If your answer’s yes, the next step would be to consider the three basic principles of innovation grants

1. New Knowledge 2. Experimentation and 3. Uncertainty

These three principles all flow into each other.

Lets explain these principles using actual case studies.

1. New knowledge begins by identifying a gap in the market.

A toy company (Copter’s Pty Ltd) that manufactures radio controlled helicopters decided to develop a new model that included a multi-lingual voice recognition system. The company wanted to integrate headset and microphone control into their helicopters. Some web searches were done and the result was that there seems to not be an off the shelf product available in the world that solves this problem.

An organic beverage manufacturer and formulator (Organics Pty Ltd) realised that the short shelf life of organic beverages is a limiting factor for exportation. Some web searches were done and the result was that there seems to not be an off the shelf product available in the world that solves this problem.

2.Experimentation

Copter’s Pty Ltd soon realised that the new additions proposed many challenges. The engineers had to trial different technologies in order to get the best result.

At this point Organics Pty Ltd started developing a solution to fill the gap that was found. The development process required experimentation and different iterations of the product. The process is an ongoing process as Organics Pty Ltd is continuing to improve their findings in this area.

3.Uncertainty

Both Copter’s Pty Ltd and Organics Pty Ltd didn’t have certainty at the outset that these new projects were going to work. They did believe that each would be a success but the final products were achieved through much trial and error.

These final products are the items that filled the initial gap and are now the new knowledge that each company has brought to the world.

The main innovation grant available in Australia is the R&D Tax Incentive and can definitely be applied to the manufacturing industry should the project be eligible. You can find more information and apply for it here
.

FOREIGN REVENUE BEING BROUGHT TO AUSTRALIA GRANTS

This avenue is simpler to explain than that of innovation grants.

There is funding available for exporters who are spending money on marketing their products to foreign markets.

Again, three basic principles, the first being an Australian product, the second being that revenue flows to Australia and the third being that marketing expenses are recognised in Australia.

1.Australian Product

The product needs to be either completely made in Australia or the majority of the product made in Australia.

If the products have an element made in a foreign country e.g.China it could still be considered an Australian product.

2.Revenue flows to Australia

The revenue gained from the Australian products being marketed abroad needs to be recognised in the Australian entity.

An entity need not have actual revenue in the first two years of applying for this grant.

3.Marketing expenditure being recognised in Australia

Expenditure spent on marketing to foreign markets needs to be recognised in the Australian entity.

These expenses could include staff and consultants employed in the foreign country, flights, conferences attended, Google and Facebook advertising, websites targeted overseas, trademarks and patents, pamphlets and flyers made and free samples being given to enter a market.

The incentive described above is known as the Export Market Development Grant (EMDG), and it can be applied for here
.

EMDG offers up to a 50 per cent grant on the expenses described above.

Statistics show that about 70 per cent of eligible Australian companies either are unaware that they are eligible, or simply don’t know how to go about accessing the funding available.

Best practice would be to consider the principles explained above, and enquire as to a possible benefit and eligibility.

The days of no private funding being available in the Australian tech industry have gone. The good news is both new and old funds are on the lookout for our best and brightest start-ups so brush up on your communication skills and learn the art and psychology of pitching.

The structure and makeup of a good start-up pitch deck is readily available and any entrepreneur worth their salt knows time and energy needs to be spent getting it polished and to the highest standard.

Interestingly enough though, I’m not sure how much brainpower is actually driven towards the subtle psychological nuances of a great pitch.

Let’s step out of the realm of investor pitches for a moment and try to analyse why a simple beer or coffee with a friend is enjoyable.

Could it be the topic of conversation? Many people would reply in the affirmative. But I disagree. That very same topic of conversation with a person you don’t gel with suddenly becomes numbingly boring.

So what is that magic ingredient? Simple. The person on the other end of the conversation is engaging and somehow understands what is required to keep you entertained.

Just bear with me for a moment.

Let me take your mind back to a classic Oscar award winning film – The Gladiator. Maximus is forced to win his first gladiator fight. Maximus shouts out at the crowd in disgust: “Are you not entertained, are you not entertained!”

Proximo decides to unlock Maximus’ desire for revenge and explains to Maximus how he had once got an audience with the emperor. Proximo explains, and I quote, “…Learn from me. I wasn’t the best because I killed quickly. I was the best because the crowd loved me.Win the crowd, win your freedom. ”

In those words from Proximo can be found a hidden secret that, if uncovered properly, can transform a pitch.

I have seen it all too often. A presenter will get caught up with what is on the slides or with the detail of the technology, and forget they need to weave together a story about their journey and the vision they have.

When we watch movies, why is it that we cry, laugh, feel sympathy, empathy, anger and elation? It’s because the director and his team are experts in storytelling.

Allow me to reword Proximo’s advice to Maximus into start-up terms. It would go something like this: “Capture the investor, capture your opportunity at success.”

This is, of course, much more difficult to do than following a skeleton of a pitch deck.

But here are a few suggestions on how to capture your audience when pitching:

Research your audience

their likes and dislikes

articles about them

LinkedIn

2. Less is more when opening a pitch

think big picture

make your opening slide memorable

consider using a HD image that somehow relates to your topic

3. Make a tweet – a short statement that describes succinctly what you do

there are many terms to describe this but the latest is tweet

other terms are elevator pitch or a 30-second pitch

make it engaging and interesting

put this on your front slide

make sure it’s short (two sentences max)

be very sure that it describes what you are doing

4. Tell a personal story

every start-up has many interesting and individual stories

choose one or two that may engage your investor

find the right time in the pitch to tell them

humour is always appreciated, if you can pull it off (If you can’t pull off humour, stay away from it)

5. Have few words in your deck

make the deck graphical and illustrative

you should know your pitch and the deck should be a visual aid,

don’t simply read the words that appear on the slide

6. Have two decks

one for pitching

one for emailing out (this one has more words in it)

7. Do something to create dialogue

consider asking a question that will interest and involve the crowd

8. Sell the vision

start with your vision and beliefs

capture your audience

then get into more detail

9 . Use a graphic designer

don’t under estimate the power of a professional looking deck

a visually beautiful deck makes a great impression

please don’t use a deck with “copy-paste” items from word

10. Don’t be desperate

no-one ever landed the supermodel by begging for a date

present confidently and keep in your back pocket that there are other sources of money

Remember this the next time you need to pitch; one little story could change everything.

The R&D tax incentive has been a bastion of innovation in Australia for decades, and Malcolm Turnbull’s announcement that Australia was to support the ideas and tech boom was met with great applause and accolade.

But, as the old saying goes, the proof is in the pudding.

Other than some assistance for investors (of which investors who are also founders of the entity are excluded), what has actually been done to support our rising tech stars?

As both a director of a fund and an advisor to many seriously talented startups, I am, to put it politely, appalled by the federal government’s suggestion to reduce the R&D tax incentive.

I have seen the magnanimously positive effects of the cash rebate benefit of this tax Incentive on hundreds upon hundreds of occasions. The absolute elation when that cash comes through the door is plain to see, and allows that little breather needed to build a startup.

That’s important, as one of the biggest pitfalls of startups is the difficulty to get to that next stage.

I often use the analogy of a rock climber. The rock climber looks for that next small little protrusion of rock that will serve as his handle to lift himself up to the next point. A small crevasse for his hands or feet to balance while he holds on in order to keep going. This will continue until, finally, an opening is reached, a breather can be had, and then onwards and upwards to the peak.

There would be no peak if it weren’t for the little crevasses along the way.

At least the rock climber usually has safety gear. Should he or she slip they can start again.

But once a startup starts that climb and runs out of funding, it’s an all-out scramble, and the fall can be quick and painful. Down rounds, debt, desperation and more. And please don’t think I am being over dramatic here, I am not.

Talented professionals leave their jobs and mortgage their homes with the dream of building their technology startups. Rather than a cut in funding, the government should be pursuing policies that encourage R&D as these tax incentives to early-stage businesses are critical.

Now I’m sure very smart politicians will say this wasn’t their choice and the government doesn’t need to fund these types of decisions.

This would be a fair argument, until you take into account how I opened this piece.

Turnbull’s innovation statement came out with trumpets blowing as to how this was the era of the technology startup, and how our technology talent was going to replace the glorious coal era.

And of course, how this innovative and forward thinking government was going to be one of the anchor support structures of Australia’s tech birth.

A number of months ago the government introduced tax incentives for early stage investors whereby from 1 July 2016, if you invest in a qualifying early-stage innovation company (ESIC), you may be eligible for tax incentives.

A few of the startups we work with have contacted us and asked: “I have an investor who wants to put in money but they want to make sure they are going to get the tax incentive, what do we need to do?”

There are three things that need to be considered:

What do the investors need to know?

Does your company meet the requirements as an ESIC?

What to report to the ATO once you receive an investment

Investors

To qualify for the tax incentives, investors must have purchased new shares in a company that meets the requirements of an ESIC immediately after the shares are issued. The shares must be issued on or after 1 July 2016.

The benefits for investors are:

Non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments. This is capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year. There is a cap of $50,000 for investors that that don’t meet the ‘sophisticated investor’ test.

Modified capital gains tax treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than 10 years may be disregarded. Capital losses on shares held less than ten years must be disregarded.

The investor must determine whether they are eligible for the early-stage investor tax incentives (for example whether they are an affiliate of the ESIC), in addition the onus is on the investor to confirm that the company qualifies as an ESIC at the relevant test time. The investor should keep records to support their entitlement to the early stage investor tax incentives.

ESIC

A company will qualify as an ESIC if it meets both:

the early stage test and

either the 100-point innovation test or principles-based innovation test

Practically, the simplest way to determine its eligibility is if a company undertakes activities that meet the 100-point innovation test, as opposed to the principles-based innovation test.

A company can instead choose to request a ruling from the ATO on whether it qualifies as an ESIC.

Reporting for investors

In order to get the benefit you claim the early stage investor tax offset in your income tax return. If you do not use all of your tax offset in that year, you can carry it forward for use in future income years.

Reporting for ESICs

Companies are required to report information to the ATO if they issue new shares to one or more investors during a financial year that could lead to an investor being entitled to access the early stage investor tax incentives.

The company must report the information to the ATO by 31 July each year for new shares issued in the previous year.

The form to report information is being developed.

In the meantime, for each investment that a company receives during the year that may give rise to an investor accessing the tax incentives, it should keep the following information in order to report:

ABN, name and address for the investor (plus the date of birth for investors that are individuals)

number of new shares issued to the investor

amount paid for the new shares

date the shares were issued

percentage of shares in the company held by the investor immediately after the shares were issued.

The company also needs to make sure that it meets the requirements for being an ESIC. When reporting, you will be asked to specify whether the 100-point innovation test or principles-based innovation test has been applied, and whether you have received a ruling on your eligibility.

Companies will report this information electronically when the form becomes available.

When getting an investment, both the investee and the investor should keep records to show that the company meets the requirements of being an ESIC and the investor is eligible for the tax incentive.

They should also keep records of the investor’s particulars, as well as the details of the share issue. ESIC’s should ensure they report by 31 July and investors should remember to include the details in their tax return.

Speaking at StartupSmart’s
Budget Briefing Breakfast on Thursday morning at General Assembly in Melbourne, Rimon Group director Lior Stein said the regulatory sandbox for fintechs will benefit all startups, and new cash incentives to run internship programs will prove useful too.

This is something for all founders and entrepreneurs to be aware of, even if they’re not operating in the financial services space, Stein said, because it will provide information on new and cutting-edge technologies that might make running a business smoother.

“That’s what technology will do – make it easier,” Stein said.

“It will make your business easier to run and it will make it easier for everyone.”

Stein says startup founders should use this sandbox to become early adopters of new fintech apps and services, making them leaders in the space and providing a competitive advantage.

We’re exceptionally fortunate to be living in a country that prides itself on the potential of its people and takes active steps to support that talent in their business endeavours.

The research and development tax incentive, arguably Australia’s premium government business incentive, is one of those active steps.

However, there is a problem.

Unfortunately, too many businesses in Australia simply aren’t aware of the significant cash flow benefit they could be adding to their business by making use of the tax incentive.

According to Lior Stein, Director at Rimon Advisory, around 60 per cent of its clientele simply didn’t know the incentive existed; or they knew about it but were under the impression they were not eligible.

In short, the incentive offers a company making below $20 million in revenues a 45 per cent benefit on any of its research and development spend.

If the company is operating at a loss, the 45 per cent benefit would come in cash. As a simple example, if the organisation had $200,000 of research and development expenditure and was in a loss situation there would be a $90,000 cash injection through the tax incentive.

On the other hand, if the company is turning a profit they would be entitled to an additional 15 per cent tax benefit on the research and development spend. Using the same example, on normal deductions of $200,000 the tax benefit would be $60,000, being 30 per cent of the deduction. With the tax benefit it would be $90,000, being 45 per cent of $200,000, giving an additional $30,000 in tax benefits.

A very important point to note is that the incentive works on a financial year basis. Meaning that a company can claim on their research and development expenditure for their past financial year’s operations.

The deadline for submission is 10 months after the company’s year-end. For companies with a year-end of June 2015, that deadline is fast approaching at the end of April this year.

The benefits of using the incentive can be game changing.

Fame and Partners, one of Australia’s up and coming fashion tech start-ups, is one good example on how the incentive can be a major benefit to companies like them.

Nyree Corby, the company’s founder, used the incentive for a number of years to keep the start-up cash flow positive. This also allowed her to concentrate on building the business value without having to raise capital too early. The good news is that Fame and Partners is now poised to be one of Australia’s next great tech companies.

But it’s important to note the incentive is not only for technology companies.

Any organisation that meets the definition of R & D according to AusIndustry may be eligible.

To simplify it, business owners throughout Australia should be asking themselves the following question: “Are we doing something in our industry that is different from the competition and new in the market?”

But does this initiative require some sort of development?

Some examples could be a beverage with a longer lasting shelf life, a new way of cleaning swimming pools, or perhaps a tool to assess the structural soundness of buildings. The list is endless.

So, if you are innovating in your business category you may be eligible.

Here are some important points to note when considering a research and development tax incentive claim:

1. You should have valid reasoning for each and every figure being claimed. Don’t simply claim a standard percentage of all your deductions

2. Understand clearly which staff were really involved in the innovation, don’t convince yourself that more or less work was done

3. Don’t miss out on the smaller claimable items, they add up

4. When articulating the innovation be articulate — you are selling it to government

5. If this is a second year claim or onwards don’t simply copy and paste the previous year’s work. Find the new innovation that was done in that year

6. The programme is a self-assessment programme (it is part of the Tax Act), assess yourself honestly

7. Don’t miss the deadline, once missed that year’s claim has been lost

8. Don’t assume you aren’t eligible; there is a good chance you are

For small and medium enterprises, the theory is that the government is allowing you to use some of your tax losses today; rather than needing to wait until you are able to offset your tax losses against your tax profits in the future.

Australia tops the globe for loss making entities with the 45 per cent cash back benefit. But when it comes to profit making entities, Australia is also seriously up there as one of the front runners.

Many technology entrepreneurs are upbeat about Australia’s future in technology startups, including prominent Australian and Silicon Valley tech entrepreneur, Sam Chandler, who has hailed Australia’s new focus on start ups and the encouragement and vision by Prime Minster Malcolm Turnbull in making Australia more digitally innovative.

Chandler is the founder and CEO of Nitro. In 2005, the Tasmanian launched Nitro in Melbourne, and now the company is a leading competitor to Adobe PDF and boasts a vast customer base, including big names such as GE, Nestle and the European parliament. With offices in San Francisco, Melbourne, Dublin and Slovakia, Chandler travels around the world and keeps abreast of startup trends, the Forbes
magazine reported.

Although he sounded resolutely positive about Australia’s tech startup future, Chandler said the main hiccup to further growth is the lack of access to capital. To resolve this issue, Chandler called for innovative strategies that could secure Australia’s tech and innovation future.

Using pension funds

Offering a solution to solve the big problem, Chandler advocates the use of a tiny portion of Australia’s $2 trillion superfund pension to support the country’s venture capital market. Australia’s pension fund is considered the fourth largest in the world.

Noting that it takes a decade to build a strong local venture capital market base, Chandler wants Australia to attract more U.S. VC’s in the interim. He said the real value of VCs from America is their experience and networks.

“We don’t need to be protectionist about this. What if we went to all tier one U.S. VCs and offered them a co-investment fund and tell them ‘The Australian government welcomes you.’ We would see a material change in start-ups,” said Chandler.

Vital for GDP

Meanwhile, a recent report from PricewaterhouseCoopers also underscored the need for fostering an eco system that could create more start ups in Australia. The report, “Expanding Australia’s Economy: how digital can drive the change” said the successful adoption of digital change could reduce Australia’s estimated federal budget deficit by $6 billion and contribute an extra 1.5 percent to Australia’s gross domestic product by 2024.

The report also said that if the efforts are sustained for another 10 years, the GDP will zoom by $136 billion and create 540,000 new jobs by 2034. It recommended that Australia learn from countries such as Sweden, Canada and Singapore, The Sydney Morning Herald
reported.

Meanwhile, Rimon Advisory, a Sydney-based firm providing services and funding for startups, has announced a new fund to invest in startups even before they start earning revenue.

The fund is backed by investors such as MYOB co-founder Brad Shofer and Global Capital Holdings co-founder Gary Burg. The fund plans to invest in eight to 10 companies every year with a minimum of $30,000, Business Insider
reported.

“We look to invest in scalable technology. That’s the rule of thumb… but a lot of it is based on who it is,” said Rimon Advisory director Lior Stein.

An interesting anomaly about government funding is that, on the one hand it is such an attractive source of cash, but on the other hand the majority of eligible companies either don’t know it exists or don’t know how to access it.

If I were to simplify government grants I would explain them in two points; the first being Innovation and the second being assistance for bringing foreign revenue to Australia.

The benefit involved in attaining government funding can be quite large and at times could amount to between 40 and 50 per cent of funds spent in innovation or marketing to foreign markets.

Innovation: the R&D Tax Incentive Program

The beginning of assessing innovation is quite simple. Ask yourself the following question, are you doing something different that you believe your competitors aren’t doing and that is new in the space?

If the answer to that question is yes then the next step would be to consider the three basic principles of innovation grants: new Knowledge, experimentation and uncertainty.

These three principles all flow into each other. Let me explain them using actual case studies.

New knowledge begins by identifying a gap in the market

A large technology and integration company (SolarCapture Technologies Pty Ltd) decided to implement a strategy that would diversify its customer base and product range.

It identified, through preliminary research, that there was a major gap in the market for providing a smart energy management and forecasting tool.

A software company (Innovation Pty Ltd) had an idea to assess the food levels in a person’s fridge. Through the use of different cameras installed into a fridge, the homeowner is notified when certain food stocks in their fridge become depleted.

Some web searches were done and the result was that there seems to not be an off the shelf product available in the world that solves this problem.

This development process required experimentation, including physical and virtual environment testing and systematic experiments. Following many failed and partially failed tests, the company succeeded in developing a final operating product.

Innovation Pty Ltd put some of their developers on the project. The developers looked at many different methods of getting the product to work optimally. Mistakes were made along the way and valuable lessons were learned in order to arrive at a final operating product.

Uncertainty

SolarCapture and Innovation Pty Ltd didn’t have certainty at the outset that these new projects were going to work. They did believe that each would be a success but the final products were achieved through much trial and error.

These final products are the items that filled the initial gap and are now the new knowledge that each company has brought to the world.

The main innovation grant available in Australia is the R&D Tax Incentive and can be applied to all industries should the project be eligible. The benefit of eligibility allows companies to claim a 45 to 50 per cent tax rebate on all expenditure relating to R&D.

This avenue is simpler to explain than that of innovation grants. There is funding available for exporters who are spending money on marketing their products to foreign markets.

Once again, there are three basic principles; the first being an Australian product, the second being that revenue flows to Australia and the third being that marketing expenses are recognised in Australia.

Australian product

The product needs to be either completely made in Australia or the majority of the product made in Australia. If the products have an element made in a foreign country such as China it could still be considered an Australian product.

Revenue flows to Australia

The revenue gained from the Australian products being marketed abroad needs to be recognised in the Australian entity. An entity need not have actual revenue in the first two years of applying for this grant.

Marketing expenditure being recognised in Australia

Expenditure spent on marketing to foreign markets needs to be recognised in the Australian entity.

These expenses could include staff and consultants employed in the foreign country, flights, conferences attended, google and facebook advertising, websites targeted overseas, trademarks and patents, pamphlets and flyers made and free samples being given to enter a market.

The incentive described above is known as EMDG (Export Market Development Grant). EMDG offer up to a 50 per cent grant on the expenses described above.

Statistics show that about 70 per cent of eligible Australian companies either are unaware that they are eligible or simply don’t know how to go about accessing the funding available. It’s best that you consider the principles explained above and enquire as to a possible benefit and eligibility.

A Bill proposing a series on new tax incentives for innovation was introduced to parliament last week to encourage new investment in Australian early stage innovation companies (ESICs) with high growth potential by providing qualifying investors, who invest in such companies, with a tax offset and a capital gains tax (CGT) exemption for their investments.

Background

The Australian Government currently provides tax concessions to support innovative Australian companies through the Research and Development (R&D) Tax Incentive, Early Stage Venture Capital Limited Partnership (ESVCLP) and Venture Capital Limited Partnership (VCLP) regimes.

The tax incentive for early stage investors (TIFESI) is designed to promote an entrepreneurial and risk taking culture by connecting relevant start-up companies with investors and aim to bridge the funding gap between pre-concept stage financing and support (typically provided through self-funding, friends and family and government offsets such as the refundable R&D tax offset) and financing through the ESVCLP and VCLP regimes for companies further along the development pathway.

The legislation can be quite confusing and time consuming to go through, so to make it easier it is summarised below. For those interested, the Bill and Explanatory memorandum can be found here
.

Summary of the benefit

There are two main benefits of the proposed legislation:

Entities that acquire newly issued shares in an Australian ESIC (as defined later on in this article) may receive a non-refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap amount of $200,000. A total annual investment limit of $50,000 applies to retail (non-sophisticated) investors.

In addition, investors may disregard capital gains realised on shares in qualifying ESICs that have been held for between one and ten years. Investors must disregard any capital losses realised on these shares held for less than ten years.

If the Bill becomes law it is proposed that these amendments apply in relation to shares issued on or after 1 July 2016 and would not be retrospective.

Which investors qualify for the tax incentives?

The tax incentives introduced by these amendments are available to all types of investors, regardless of their preferred method of investment (whether an investment is made directly as a corporation or individual or indirectly through a trust or partnership) other than ‘widely held companies’ and 100 per cent subsidiaries of these companies. A trust or partnership will not directly be entitled to the tax offset, however, specific rules apply to ensure the value of these tax incentives flow through to beneficiaries and partners, where such an investment method is chosen.

To ensure the tax offset is broadly available for all prospective investors, there are also no restrictions on an investor entity’s residency. That said, the tax offset may be less attractive to foreign residents that do not have an Australian income tax liability.

Non-sophisticated investors are limited to investing amounts of $50,000 and below in an income year.

There are some relationship restrictions on the investors:

In order to qualify for the tax offset, the ESIC must not be an affiliate of the investor entity nor can the investor entity be an affiliate of the ESIC at the time the relevant shares are issued.

In order to qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities ‘connected with’ the ESIC.

What type of investment qualifies?

Qualifying shares are newly issued equity interests that are shares in a qualifying ESIC. These rules ensure that the tax incentives are targeted at new investors in a qualifying ESIC rather than shares issued under an employee share arrangement or in relation to interests with a debt character, such as preference shares. Investors that acquire equity interests from the conversion of convertible notes are not precluded from qualifying for the tax offset, where the company issuing those equity interests is a qualifying ESIC at the time of the conversion into shares.

What is a qualifying ESIC?

Generally, an Australian-incorporated company will qualify as an ESIC if it meets the tests of being at an early stage of its development ( the early stage limb) and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return ( the innovation limb).

The early stage limb

A company must pass four tests to satisfy the early stage limb of the qualifying ESIC test. Each of these tests is discussed below:

The company must have been incorporated in Australia within the last three income years.

The company and any of its wholly-owned subsidiaries must have not incurred ‘total expenses’ of more than $1,000,000 in the previous income year.

The company and any of its wholly-owned subsidiaries must have derived assessable income of no more than $200,000 in the previous income year.

The company must not be listed on any stock exchange

The innovation limb

In order for companies to determine if they satisfy the innovation limb of the qualifying ESIC test companies may choose to:

apply their circumstances against the objective tests
;

self-assess their circumstances against the principles-based test
; or

seek a ruling from the Commissioner about whether their circumstances satisfy the principles-based test.

The principles-based test

To meet the principles-based test, a qualifying ESIC will need to be genuinely focused on developing its new or significantly improvedinnovation
for the purpose of commercialisation
and show that the business relating to that innovation:

has the potential for high growth
;

has scalability
;

can address a broader than local market
;

has competitive advantages
.

To further define these 7 requirements:

Innovation

The Oslo Manual, published by the Organisation for Economic Co-operation and Development (OECD) provides a description of different types of innovations and a copy of this manual is available on the OECD website ( www.oecd.org)
.

New or significantly improved

The innovation that is being developed by a qualifying ESIC must either be new or significantly improved for the applicable addressable market.

Commercialisation

The company must be focussed on developing its innovation for a commercial purpose, or in other words, for the purpose of generating economic value and revenue for the ESIC.

High growth potential

A qualifying ESIC would need to show that it has the potential for high growth within a broad addressable market.

Scalability

A qualifying ESIC must have the potential to successfully scale its business.

Broader than local market

A qualifying ESIC would need to demonstrate that it has the potential to address a market that is broader than a local city, area or region.

Competitive advantages

A qualifying ESIC will need to demonstrate that it has the potential to have competitive advantages, such as a cost or differential advantage over its competitors which are sustainable for the business.

Objective tests

As an alternative to satisfying the principle-based test for a qualifying ESIC, a company may be a qualifying ESIC if it has at least 100 points
for meeting objective innovation criteria as listed below:

Item

Points

Innovation criteria

1

75

At least 50 per cent of its total expenses for the previous income year constitute expenses which are eligible for the tax offset for R&D activities.

2

75

The company has received an Accelerating Commercialisation Grant.

3

50

At least 15%, but less than 50%, of its total expenses for the previous income year constitute expenses which are eligible for the tax offset for R&D activities.

4

50

It is undertaking or has completed an eligible accelerator programme.

5

50

A third party has previously invested at least $50,000.

6

50

It has one or more enforceable rights on an innovation through a standard patent or plant breeder’s right that has been granted in Australia or an equivalent intellectual property right granted in another country.

7

25

It has one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country.

8

25

It has a collaborative agreement with research organisation or university to commercialise an innovation

What are the reporting requirements for the ESIC?

ESICs that receive investments from one or more investor entities in a financial year will need to provide information about those entities to the Commissioner 31 days after the end of the financial year. For most companies, this would be 31 July of the following financial year. ESICs will need to provide this information in the ‘approved form’.

When does it come into affect?

If the Bill becomes law it is proposed that these amendments apply in relation to shares issued on or after 1 July 2016.

Venture capital investment

As part of the same Bill, Schedule 2 amends the early stage venture capital limited partnership (ESVCLP) and venture capital limited partnership (VCLP) regimes to improve access to venture capital investment and make the regimes more attractive to investors. The amendments provide an additional tax incentive for limited partners in new ESVCLPs, relax restrictions on ESVCLP investments and fund size and clarify the legal framework for venture capital investment in Australia.

Conclusion

It is very encouraging to see the government introduce these measures in order to foster investment in early stage innovation companies in Australia. Their definition of an ESIC or start-up is interesting and likely something that will generate further discussion.

Let’s hope that this Bill gets passed and passed soon so that start-ups currently raising, or planning on raising in the near future, are not adversely affected by investors waiting to utilise these benefits.

Speaking at StartupSmart’s
Budget Briefing Breakfast on Thursday morning at General Assembly in Melbourne, Rimon Group director Lior Stein said the regulatory sandbox for fintechs will benefit all startups, and new cash incentives to run internship programs will prove useful too.

This is something for all founders and entrepreneurs to be aware of, even if they’re not operating in the financial services space, Stein said, because it will provide information on new and cutting-edge technologies that might make running a business smoother.

“That’s what technology will do – make it easier,” Stein said.

“It will make your business easier to run and it will make it easier for everyone.”

Stein says startup founders should use this sandbox to become early adopters of new fintech apps and services, making them leaders in the space and providing a competitive advantage.

One of the oldest arguments in the history of psychology is the Nature vs. Nurture debate.

However, what if I told you that the success of start-ups does not relate to the conflicting debate of nature vs nurture but in-fact start-ups need to nurture the nature.

To be successful as a start-up, you need to have a naturally
innovative idea, one that disrupts your industry. However, even more importantly is how this idea is nurtured
and evolved into a successful business.

The nurturing becomes an important part of the start-up life-cycle, and essentially the success of this revolves around the community that is built around the start-up; that being the management team, board of directors and last but not least advisors. Smart founders want the support of high-profile advisors who can offer PR, connections, clout and capital. However, the process of choosing the right advisor requires a strategic look at a mix of factors.

So, what should you look for in a Strategic Advisor?

An understanding of your space

When explaining your business, technology and vision to a prospective advisor, it is important that the advisor understands the particular ‘space’ your start-up will operate in. For example, if you’re developing a software for the Fintech industry you should find someone with previous experience in the Fintech industry having a technological and financial background. They will assist you considerably more than a legal advisor.

However, more importantly, the advisor should have an idea of the entrepreneurial ‘space’. He should have an understanding of the environment all entrepreneurs operate in, and what competitive edge is needed to succeed.

Understanding the start-up space comes with an acknowledgement that not everything is charged for. An advisor should be willing to veer off the topic being paid for when he/she notices a different area that requires some attention.

The philosophy is simple, build a relationship in the early stages and grow together into success.

Experience

A common pitfall of entrepreneur’s is chasing “big names” for advisors and mentors. That is normally not the right strategy. Often these individual’s cannot dedicate the necessary time to you.

Instead, it is important to find suitable advisors with experience in growing businesses. Credentials could include successfully founding and exiting companies & relevant work experience within your industry classification.

An effective adviser should be a problem solver. One who can advise you on what to say and do when the burden of leading and deciding matters for the entire company become taxing. They should be able to say; “We know what you’re going through. Now, here’s how we fix it”.

Personal Chemistry

Always remember, your advisors are going to be suggesting pathways you would not have thought of. They need to be professionals whom you respect enough to listen to and take seriously.

Grey hair and a flashy business card don’t necessarily equate to personal chemistry.

When investing in start-ups the term “follow your gut” is often mentioned. Do the same when selecting your advisors

The best advisors are ones whom you can build a 100% trusting and transparent relationship with. Are they truly interested in your vision and growth? Are they going to help you get to your destination?

Picture your success and imagine yourself being able to make the statement “I couldn’t have done it without them!”

Watch out for the Pretenders!

In today’s world, where everyone is seen to be an “expert” at something, it is becoming easier for start-ups to get fooled by little more than generic advisors (or even worse, total pretenders)!

Ask questions that test their apparent expertise within the start-up space and your industry space. How many start-ups have you helped? You can even ask for references. Start-ups are commonly cash-strapped, how as an advisor do you deal with that?

Start-ups and small-to-medium enterprises have many enviable characteristics, but healthy cash flow is not often one of them.

Australia has recognised this point for quite some time and has put billions of dollars into this area.

It’s not alone. Governments around the world recognise the importance of the start-up and SME sector. As the OECD Science Technology and Industry Scoreboard notes, “firms five years old or less generated on average nearly half of all new jobs over the past decade”.

Not only do governments recognise the value start-ups bring for job creation, but also the immeasurable value they bring to the economy via innovation and thinking outside the box.

To this end, governments have been pumping money into research and development, with Australia leading the charge.

Start-ups in Australia can benefit from a 45 per cent cash back benefit purely based on R & D expenditure, rather than on any revenue measure.

Elsewhere, Portugal, France, Canada and the UK are among the biggest supporters of R & D for small profitmaking entities.

In general, R & D support is provided via tax incentives. Now, start-ups and SMEs must consider whether they will see increased tax credits, or ‘super-deductions’, or if governments will take a true leap of faith to offer incentives in cash.

The Australian Government recognises the need for start-ups to have short-term cash and has supported them by giving the highest cash back percentage of any country and has only a short delay between submission and receipt of cash.

The OECD Scoreboard says that five times more indirect cash (cash received from all government incentives, not just R & D) was pumped into the start-up and SME sector in Australia, compared with direct investment such as private funds and venture capital.

Countries such as France, Canada, Norway, Australia and Austria offer the loss-making start-up at least the same R & D tax incentive benefit, and in certain instances a greater benefit, in recognition of the fact that short-term assistance is required and that increased tax losses that may only materialise in three to five years’ time are often futile as the company may not last that long without a cash injection.

Indeed, Australia offers loss-making start-ups a greater benefit than their profitmaking peers, as the 45 per cent actually comes back in cash.

OECD innovation surveys for 21 countries showed that firms receiving public support for innovation invest 40 per cent to 70 per cent more than those that do not. And the more a firm invests in innovation, the higher its sales and productivity.

What’s more, a start-up that has successfully accessed the Australian R & D tax incentive, and other government incentives and grants, has a higher chance of raising private capital. Investors see the incentive as a risk mitigator and it further shows the company’s awareness of different avenues to attain funds.

Unfortunately there is a perception that R & D is either done in a lab or exclusive to the IT sphere. SMEs are missing out on assistance that could really make the difference in the future of the company.

Manufacturing, mining, health and medical, tourism, fashion, and food and beverage are among the industries that benefit from R & D tax incentives globally.

Australian start-ups and SMEs are in the front seat, with the government offering an R & D tax incentive that is competitive on the world stage.

All Australian businessmen and women should be taking advantage of this opportunity to kickstart their innovation.

The flavour of the month is tech start-ups and today’s release of the innovation statement was highly anticipated. Some impressive big announcements were made but an interesting comment was said to the tune of governments needing to be as agile as the start-up businesses it invests in.

Further to this, comment was made on previous parliamentarians being judged on immediate success where Turnbull said a degree of failure was inherent and learnings need to be gained.

Was this a clever method of allowing for failure, a get out of jail free card if you will?

Imagine Stephen Moore standing up before the beginning of the world cup and making a statement like … we are here to try our best but if we fail that’s ok, we would have learned a lot.

The country would either laugh him off the stage or be sickened by the weakness of the statement.

What was going through the Prime Minister’s mind when he made that comment?

Let’s analyse the statement a bit further, would a start-up raise one cent if its founder stood up and proclaimed that failure was acceptable?

In actual fact, if worded correctly, it probably would.

One of the main traits to look for when investing in start-ups is something called coachability (you won’t find this word in the Oxford dictionary … yet … but with the start-up scene exploding I predict that it will make its debut amongst alphabetised words in the near future).

An investor wants to see that a founder can take criticism and be able to admit when he is wrong and then be flexible enough to change course and fix the problem.

Australians are a talented bunch, but if we read into the Prime Minister’s comment what is he really saying?

He is leading by example and telling Australia to stop playing it safe.

Step out, take risks and love every single moment of it! The government supports you in trying crazy ideas that may fail, but they may also succeed!

The Prime Minister’s little comment was ingenious; he was changing the mindset of an entire country, an entire nation!

Why is Australia such a successful sporting country? There are many reasons but one of the main reasons is that they totally and utterly believe in themselves, whether misplaced or not.

This belief is what is required for Australia to leapfrog into being one of the world’s pole position innovating nations.

Turnbull hits the nail on the head, this is what I think he is saying:

1.Be agile – understand that many curve balls will be thrown at you along the way.

Prime Minister Turnbull is clearly positive on the role of innovation and start-ups in the Australian community, which is really great. But as he gets ready to unveil his long awaited innovation statement, let’s be honest about the effectiveness of this policy document.

Will it meet the needs of all start-ups? To answers that, it’s important to understand that a start-up has a life cycle and depending on what stage of the cycle a start-up is in will depend on what it needs.

As such trying to find policy that fits all start-ups, isn’t going to be easy and certainly won’t be able to please everyone; the first step in the process will require clarifying the stages that a start-up has to go through.

Ideation

The founder(s) will see a problem in their world and make a decision to solve that problem. They will brainstorm and come up with a solution that solves that problem and then ideally go do some research to check that that problem-solution combination has not already been addressed and that there is a market for their idea.

MVP

They start building a proof-of-concept/prototype/minimum viable product (MVP) that demonstrates the solution to the problem. Then beta testing begins with a small group of trusted test subjects. Valuable feedback is received and changes are made accordingly.

Early stage commercialisation

The product is ready to show to the world. Marketing begins and real users start using the product. At this stage the founding team are still wearing many hats each and stretched to their capacity while they grow their user base and hopefully their revenue.

Commercialisation

The company now has proven there is a demand for their solution. They have real customers and now they start to scale out the business by bringing on staff and spending money to further grow their user base.

The company will continue in this growth pattern until it becomes a stable real business and no longer a start-up. Each of the steps can take a different amount of time depending on the kind of business and the success they see and the support they get along the way.

So how can the government help?

It’s during the first three stages that start-ups need the most help to survive, as generally once they reach commercialisation, they can raise funds from the private sector.

Where policy can help is by looking at the common things that all start-ups need going through these three stages.

The first place to start would be to give start-ups the help they need to turn their product into a reality. A great product doesn’t mean much if no-one knows about it and while the current incentives such as the R&D Tax Incentive and Export Market Development Grants (EMDG) are great they are limited to building a product and marketing overseas. What about marketing locally in Australia which is where most start-ups test their product? There is a gaping hole here. Marketing and getting customers is a key to the success of any start-up and a rebate, like the EMDG, but one that includes expenses for promotion in Australia could help. However, it would need to be limited to companies with less than $500,000 in revenue.

All start-ups need a place to work and spend a substantial portion of whatever funding they have on rent. One way the government can help is by providing free or subsidised rental for start-ups in government funded co-working spaces.

Many start-ups make the mistake of doing too much themselves. This is understandable when you are bootstrapping and limited for funds but sometimes it can come back to bite you and can lead to a poorly run company which ultimately leads to failure. The government can play a role in helping many start-ups gain fiscal knowhow by providing a rebate for start-ups who spend money on running a good business by hiring a bookkeeper, tax agent and lawyers to make sure their basics are properly covered or alternatively incentivise service providers to give start-ups lower rates or even free services.

My final suggestion to the government would be to partner with those that know. There are a number of experienced entrepreneurs in the Australian community who have setup workspaces, incubators, accelerators and mentor/training programs. Programs like Accelerating Commercialisation show great intention but have clear limitations.

Instead of sheltering the money in government run programs that are limited by bureaucracy, partner with existing private organisations by providing them the funding to allow them to better do what they do best and support start-ups in succeeding.

Last night, Rimon attended a wrap up event organized following StartupWeek Sydney 2015
. There was an overwhelming sense of optimism by all who attended, that not only Sydney but Australia’s start-up ecosystem was thriving with a vibrant level of energy and momentum.

This year’s StartupWeek had over 8,000 attendees featured in over 63 events in 39 venues. The festival featured conferences, hackathons, workshops, pitch nights, panels, exhibitions and other events that focused on encouraging aspiring and established entrepreneurs to learn from investors, industry leaders and other entrepreneurs and to celebrate the unification of the start-up community within Sydney. Additionally, on the agenda was a focus on exploring how women can play a greater role in tech and fostering an eco-ystem that allows more kids to get involved.

There were 4 key announcement made during the weeklong festival:

SydStart Conference is moving to Melbourne

Freelancer announced that its SydStart conference is rebranding to StartCon and moving to Melbourne next year following a $1 million investment from the Victorian government. SydStart previously attracted more than 2,000 attendees that included top investors, entrepreneurs and mentors from around the global startup scene. This will be a major blow for the City of Sydney, and all start-ups that call Sydney home.

Rimon Investments announces new seed capital fund

Rimon Investments made a major announcement during the festivities. The introduction of a new start-up seed capital fund has been launched upon the growing optimism in Australia’s start-up community. With a willingness to invest into pre-revenue start-ups that have developed technologies that could cause disruption within their industries, capital is available to entrepreneurs to help them turn their ideas into an amazing reality.

StartupWeek Australia is growing nationally!

Michelle Williams, national manager of StartupWeek Australia, intends to take the event national next year, with Melbourne and Canberra plans already in progress and events in regional areas on the agenda.

Fairfax media has partnered with StartupWeek Australia

Fairfax media has partnered with StartupWeek Australia in order to encourage national conversation for innovation and entrepreneurship in business.

An interesting anomaly about government funding is that, on the one hand it is such an attractive source of cash, but on the other hand the majority of eligible companies either don’t know it exists or don’t know how to access it says Lior Stein from Rimon Advisory.

If I were to simplify government grants I would explain them in two points:The first being Innovation and the second being assistance for bringing foreign revenue to Australia.The benefit involved in attaining government funding can be quite large and at times could amount to between 40% – 50% of funds spent in innovation or marketing to foreign markets.

The beginning of assessing innovation is quite simple. Ask yourself the following question, are you doing something different that you believe your competitors aren’t doing and that is new in the space?If the answer to that question is yes then the next step would be to consider the 3 basic principles of innovation grants

These three principles all flow into each other.Lets explain these principles using actual case studies.

1. New knowledge begins by identifying a gap in the market.

An organic beverage manufacturer and formulator (Organics Pty Ltd) realised that the short shelf life of organic beverages is a limiting factor for exportation. Some web searches were done and the result was that there seems to not be an off the shelf product available in the world that solves this problem.

A doughnut maker (Jam Pty Ltd) realised that the insertion of jam into doughnuts was exceptionally time consuming and limited the speed of their production run. Some web searches were done and the result was that there seems to not be an off the shelf product available in the world that solves this problem.

2. ExperimentationAt this point Organics Pty Ltd started developing a solution to fill the gap that was found. The development process required experimentation and different iterations of the product. The process is an ongoing process as Organics Pty Ltd is continuing to improve their findings in this area.

Jam Pty Ltd needed to automate their insertion of jam and cream into their doughnuts process. Process engineers were hired to design and develop the process. Experiments were required in order to get the process precisely correct to optimise the automation

3. UncertaintyBoth Organics Pty Ltd and Jam Pty Ltd didn’t have certainty at the outset that these new projects were going to work. They did believe that each would be a success but the final products were achieved through much trial and error.These final products are the items that filled the initial gap and are now the new knowledge that each company has brought to the world.

The main innovation grant available in Australia is the R&D Tax Incentive and can definitely be applied to the food business industry should the project be eligible.

Foreign revenue being brought to Australia

This avenue is simpler to explain than that of innovation grants.There is funding available for exporters who are spending money on marketing their products to foreign markets.Again, 3 basic principles, the first being an Australian product, the second being that revenue flows to Australia and the third being that marketing expenses are recognised in Australia.

1. Australian ProductThe product needs to be either completely made in Australia or the majority of the product made in Australia.If the products have an element made in a foreign country e.g.China it could still be considered an Australian product.

2. Revenue flows to AustraliaThe revenue gained from the Australian products being marketed abroad needs to be recognised in the Australian entity.An entity need not have actual revenue in the first two years of applying for this grant.

3. Marketing expenditure being recognised in AustraliaExpenditure spent on marketing to foreign markets needs to be recognised in the Australian entity.These expenses could include staff and consultants employed in the foreign country, flights, conferences attended, google and facebook advertising, websites targeted overseas, trademarks and patents, pamphlets and flyers made and free samples being given to enter a market.

The incentive described above is known as EMDG (Export Market Development Grant).EMDG offer up t0 a 50% grant on the expenses described above.

Statistics show that about 70% of eligible Australian companies either are unaware that they are eligible or simply don’t know how to go about accessing the funding available.

Best practice would be to consider the principles explained above and enquire as to a possible benefit and eligibility.

Last week Rimon Advisory was part of a dynamic panel that was put together with the aim of giving Startups a few “Insider” tips on how to raise capital effectively. The event was hosted at WeCo (a collaborative co-working space for Startups). Several different perspectives on the do’s and don’ts of capital raising were shared from Investors, Crowdfunding, Consultants and successful Startups.

A few great tips came out that we thought we would share:

Research the investors you are pitching to
– who are they and what do they want to see in you? Understand what they are looking to fund. Tailor your pitch accordingly

Spelling or Grammar mistakes
– be careful when responding to e-mails or presenting your idea that you present in a professional manner. Spelling errors is a huge turn-off

Reply in a timely manner
– don’t be lazy and get back to your investors ASAP

Ask for feedback
– rejection can be a positive thing if it helps you refine your pitch and your model

Don’t demand
a 6 figure salary – you have to be willing to give up something for your idea, that something has to be financial (at least initially).

Marketing budget – often overlooked when pitching to investors and shows a lack of understanding of how to allocate your funding

Grant funding is a great way to help cash flow
– without giving away equity. You can also leverage grants to raise private capital

Financials
– even though you won’t get it 100% correct, make an attempt that shows you are well thought out

Invest effort in your pitch deck
– you only get one shot

Ideas are worth nothing
– you need to have done something to bring your idea into reality

Raising Capital is only the beginning
– then the hard work really begins!

Don’t over raise
– too much capital can lead to diversion from the core focus and ultimate failure

Own the capital raising process
– it’s fine to get assistance from external parties but don’t hand it over. Your timeline will be severely disrupted